RECORDING CONTRACT ROYALTIES: Revised

IVAN HOFFMAN, B.A., J.D.

In the years since I
wrote the original of this article, significant changes have occurred in
the recording business and so below is a revised version of the status
of recording royalties as a result of changes in technology, mostly as
a result of the Internet. In “The Six
Potential Traps In A Recording Contract” I covered in summary form
some of the issues dealing with royalty calculations. This article
will expand upon some of those points.

Clearly the most significant
change is that “hard copy” records are now primarily limited to CDs despite
a limited market for original vinyl copies and that a vast amount of recordings
are now sold via downloading.

Royalties can be paid
on the basis of a royalty rate multiplied by the manufacturer’s suggested
retail list price (SRLP) or on the basis of some “wholesale” price, sometimes
referred to as the “published price to dealers” (PPD).

The artist’s royalty rate
will of course vary depending upon the relative bargaining positions of
the parties. Deal making is, after all, about who wants who more.
However, generally speaking the artist’s royalty rate will run anywhere
from 6% to 10% or perhaps a bit higher, when based upon the SRLP.
If the label calculates royalties upon a PPD basis, the rate is about 60%
higher than the retail rate but of course it is calculated on a lower base
price. The artist may negotiate for an escalation of these rates
as the deal progresses, either based upon sales (i.e. 7% up to x units,
8% for sales in excess of x units and so on), or higher in subsequent years
and on subsequent albums. Note that I use the term “royalty rate”
since this number is vastly different than the “royalty” the artist actually
receives. More on this below.

There are also deals for
the artist which include a producer royalty, the so-called “all in deal,”
in which the label will pay an additional royalty over and above the artist
royalty to include a royalty for the producer, generally anywhere from
3% to 5% of the SRLP. Under such a deal, it is the responsibility
of the artist to pay the producer out of the all in deal. Unless
the producer is the same person as the artist, this all in deal can be
tricky for the artist to make since often third party producers wish to
be paid from the first record sold after the artist recoups. In such
an instance, it may be that the artist is not recouped because the artist
has several albums with the label but the producer is entitled to the producer’s
royalties because the particular album on which the producer worked has
recouped its recording costs. The artist is then in a cash flow bind
since it owes money to the producer but has no money coming in. And
if the artist is in a cash flow bind, likely as not so is the producer.
There are ways to handle this in the deal with the label but such approaches
are beyond the scope of this article.

The “Wrinkles”

However, the artist should
be well aware that the royalty rate the artist is being offered is often
far from the determining factor as to how much money the artist actually
receives from the sale of records. This is because that rate is applied
to a variety of provisions in which the basis for multiplying that rate
fluctuates. There are reductions in rates for foreign sales (often
half rate but negotiable for specific territories), for club sales (also
often at a half rate and frequently on 85% or 90% of records sold with
healthy discounts for promotional records, many of which provisions may
also be negotiable), for sales at a discount and for “free” goods, which
are records “given” away to customers of the label as inducements for purchases.
The “free goods” clause is often quite a problem area in negotiations since
these goods are often not actually free since the price to the customer
is often a factor of these “free” records. This clause can be complex
and unless there are firm limits, auditing this provision, which is where
lots of money is often discovered, can be quite difficult. There
are also reductions for packaging charges levied against the suggested
retail list price, often 20%-25% of that price for CD formats. The
artist should be aware that there should be no deduction for “packaging”
when it comes to digital downloads.

And speaking of digital
downloads, the negotiation should cover whether these are to be treated
as licenses and thus paid at the higher rate for licenses (see below) or
are treated as normal sales and thus paid at a much lower rate with the
said deductions.

The above are only some
of the many royalty reductions that serve to reduce the amount upon which
the royalty rate is calculated. And then, once the actual dollar
and cent figure is reached, the label is often allowed to withhold an amount,
often undefined except that it must be “reasonable,” to cover returns of
records. This category is ripe for negotiation since what is “reasonable”
is uncertain at best and without firm contractual standards, making a claim
for these monies is quite difficult. Clearly here as well there should
be no deductions for reserves against returns of digital downloads.

There are also provisions
regarding the licensing of the master recordings for other uses, such as
in films, television shows and commercials. The artist should be
aware of these provisions as this form of exploitation can be very lucrative
indeed. Most often, the label and the artist split the income from
such licenses equally but the way income is defined in the contract is
often quite determinative of how much the artist actually receives.

Conclusion

As with all deal making,
there are no firm rules that can be applied. Each deal, like each
artist, is unique. What some other band received in its contract
is not determinative of what your band might get. Having an attorney
who knows the ins and outs of the deal is quite important but in the end,
it is the marketing clout of the artist that matters as much. Knowing
what to ask for is as important as being able to command what you ask for.

These royalty calculation issues and many more make the negotiation
of a recording contract quite complex and this article is not intended
to be exhaustive of all these many issues. Since the recording contract
is often the single most important agreement an artist or producer will
sign during their careers, the artist and producer are well advised not
to enter into such an agreement without the negotiation and thorough review
of such contract by a qualified attorney very familiar with such deals.
An unfavorable contract can spell disaster for the recording artist and
producer.

This article is not legal advice and is not intended as legal advice.
This article is intended to provide only general, non-specific legal information.
This article is not intended to cover all the issues related to the topic
discussed. The specific facts that apply to your matter may make
the outcome different than would be anticipated by you. This article
is based on United States law. You should consult with an attorney
familiar with the issues and the laws of your country. This article
does not create any attorney client relationship and is not a solicitation.

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